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U.S. employment is expected to fall at a slower pace throughout the second-half of the year, with economists forecasting non-farm payrolls to drop 230K in August, and speculation for an economic recovery later this year may drive the exchange rate higher as policy makers hold an improved outlook for future growth.

Trading the News: US Change in Non-Farm Payrolls

What's Expected

Time of release: 09/04/2009 12:30 GMT, 08:30 EST
Primary Pair Impact : EURUSD

Expected: -230K

Previous: -247K

Impact the US NFP report had on EURUSD through the last 2 months

July 2009 US Change In Non-Farm Payrolls

The U.S. economy lost 247K jobs in July amid expectations for a 325K drop in non-farm payrolls, while jobless rate fell for the first time since April 2008 as discouraged workers left the labor force, and fading demands for employment may continue to weigh on the economic outlook as households scale back on consumption. Moreover, the FOMC forecasts the annual rate of unemployment to reach 10% by the end of the year, while Treasure Secretary Geithner anticipates the jobless rate to peak in the second-half of 2010, and businesses may continue to scale back on production and employment throughout the second half of the year as policy makers see a risk for a slower recovery. As the government takes unprecedented steps to stimulate the ailing economy, the extraordinary efforts should help to stem the downside risks for growth and inflation, and policy makers may continue to ease policy further to foster a sustainable recovery.

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June 2009 US Change In Non-Farm Payrolls

The June Non-Farm payroll report showed that the economy lost another 467,000 jobs which exceeded expectations of 365,000. It was the first increase in five months as the labor market had shown signs of improving. At the same time, the annual rate of unemployment increased to 9.5% from 9.4% in the previous month amid expectations for a rise to 9.6% as discouraged workers left the labor force. We didn't see the expected bearish reaction in the EUR/USD as the Euro was already trading heavy following dovish comments from ECB president Trichet. After, the previous months sharp improvement markets weren't that surprise to see a dip lower. The upcoming fourth of July holiday also led to a low volume day which impacted interest level in the release. Therefore, we were left on the sidelines without a trade. However, we did see a stronger reaction from the USDJPY which fell on the data.

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What To Look For Before The Release

Traders with access to market depth information via the FXCM Active Trader Platform may use it to gauge the potency of the economic data release as well as to shed some light on the market's directional bias. Increasing volume ahead of the announcement will telegraph likely follow-through behind whatever move is to materialize, while an imbalance in available liquidity on the Bid versus the Offer side of the market will tell us the direction major institutions are likely favoring ahead of the announcement:

Bullish Scenario:

If we see substantially deeper available liquidity on the Bid side of the market, this tells us that major price providers in the market are looking to buy the Euro against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bullish bias on EURUSD ahead of the data release.

Bearish Scenario:

If we see substantially deeper available liquidity on the Offer side of the market, this tells us that major price providers in the market are looking to sell the Euro against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bearish bias on EURUSD ahead of the data release.

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How To Trade This Event Risk

U.S. employment is expected to fall at a slower pace throughout the second-half of the year, with economists forecasting non-farm payrolls to drop 230K in August, and speculation for an economic recovery later this year may drive the exchange rate higher as policy makers hold an improved outlook for future growth. The final GDP reading showed economic activity slipped at an annual rate of 1.0% in the second quarter amid expectations for a 1.5% contraction, and the extraordinary ordinary efforts taken on by the government should continue to support the ailing economy as the Federal Reserve holds the benchmark interest rate at the record-low and commits $1.75T in asset purchases to stem the downside risks for growth and inflation. In addition, the Institute for Supply Management ‘s gauge for manufacturing payrolls increased for the third consecutive month in August, while non-manufacturing employment fell at a slower pace during the same period, and the rebound in business confidence reinforces an improved outlook for the U.S. labor market as firms look to increase their rate of production going into the following year. Furthermore, job cuts fell for the third consecutive month in August, with the annualized rate falling 13.8% from the previous year, while private payrolls slumped 298K from July amid expectations for a 250K drop, and the outlook for future employment remains uncertain as businesses continue to face fading demands from home and abroad. Moreover, continuing claims for unemployment benefits unexpectedly increased to 6.234M during the last full week of August, while initial claims fell less than expected during the final days of the previous month, and fears of a slower recovery could weigh on the greenback as policy makers anticipate the annual rate of unemployment to reach 10% by the end of the year. At the same time, Treasury Secretary Timothy Geithner held a weakened outlook for the economy and anticipates job losses to peak in the second-half of 2010 as businesses continue to scale back on production and employment, and the slump in labor demands may hamper the prospects for a sustainable recovery as private-sector spending falters. Nevertheless, as the FOMC hold an enhanced outlook for growth and inflation, and forecasts the world's largest economy to expand over the next two-years, firms may increase their willingness to retain workers as trade conditions improve. Moreover, Fed Chairman Ben Bernanke stated that the prospects for a return to growth in the near term appear good, but went onto say that the recovery is likely to be relatively slow at first, with unemployment declining only gradually from high levels as businesses continue to take steps to lower their cost structure. As a result, the Fed continued to reiterate borrowing costs will stay ‘exceptionally low' for some time and maintained its asset purchase scheme to steer the nation out of recession. However, as policy makers anticipate economic activity to improve over the coming months, the rise in the interest rate outlook may drive the greenback higher as investors speculate the central bank to tighten policy over the next 12 months.

Trading the given event risk favors a bearish outlook for the greenback as economists forecast the labor market to weaken further however, the less than expected drop during the previous month has left the door open for an enhanced NFP report. Therefore, if payrolls contract 190K or less, we will look for a red, five-minute candle following the release to generate a sell entry on two-lots of EUR/USD. Once these conditions are met, we will set our initial stop at the nearby swing high, or a reasonable distance taking market volatility into account, and this risk will establish our first target. Our second objective will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its target in order to preserve our profits.

On the other hand, the downturn in private sector spending paired with high uncertainties surrounding the macroeconomic outlook could weigh on the greenback as economic activity remains subdued, and a dismal labor report is likely to hamper the prospects for a sustainable recovery as firms continue to scale back on production and employment. As a result, if payrolls slump 230K or more in August, we will favor a bearish forecast for the reserve currency, and will follow the same setup for a long euro-dollar trade as the short position mentioned above, just in reverse.

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